Businesses invest in all kinds of insurance, from general liability policies to commercial property cover. However, few organizations take out product recall insurance because the probability of a recall is so low. Or so they believe. The truth is that product recalls happen all the time, especially in the medical device sector, where hazardous or defective products can risk lives.
You might think medical device product recall insurance is just another expense, but it could provide a financial safeguard in the event of a recall notice from the government. In this guide, learn the benefits of this insurance and how something called pre-incident funds can improve liability risks in your organization.
Product Recalls, Explained
The Food and Drug Administration (FDA) recalls around 4,500 drugs and medical devices every year, even though those products have already received approval from the government. Receiving a recall notice from the FDA can significantly affect your medical device company. As well as all the administration involved in removing devices from pharmacy and store shelves, you need to comply with all the government’s policies and procedures for recalls—or face expensive penalties.
Then there’s the expense of medical device recalls. You might need to remove products from your entire supply chain and dispose of faulty or dangerous products. That can involve shipping, warehouse, and restocking costs. According to consulting firm McKinsey, a single recall can cost a manufacturer up to $600 million.
Product recall insurance could provide a solution by mitigating some or all of these costs.
What is Product Recall Insurance?
This type of insurance covers the costs associated with product recalls, such as:
- Customer notification costs
- Warehouse costs
- Shipping expenses
- Product disposal fees
- Restocking costs
Manufacturers in all industries purchase this insurance to recover from the financial impact of a product recall, but those in the medical device sector should seriously consider this protection. That’s because the number of products recalled by the FDA is on the rise, with medical device recalls jumping nearly 36 percent in the third quarter of 2021 compared to the previous quarter.
Medical device product recall insurance can protect companies from financial loss and even bankruptcy because of a recalled medical device. Like other insurance types, manufacturers pay an insurance provider a monthly premium and can claim on their policy if they need to recover the costs associated with a recall.
What Are Pre-Incident Funds?
Unlike many insurance types, product recall coverage often comes with pre-incident fund allocation. Quality assurance managers and executives can use these funds (a percentage of the policy premium) towards recall crisis planning, management and training.
Companies can also take creative routes to reduce readiness costs. For instance, most recall insurers provide a pre-incident fund allocation (a percentage of the policy premium to be spent on risk likelihood and impact mitigation activities). Companies typically have a significant amount of leeway in how they can utilize those pre-incident funds, so long as they are focused on the reduction of likelihood or impact of a recall occurring. This includes activities such as plan development or improvement, crisis simulations/exercises and robust training on new regulations in emerging markets (e.g., Canada’s cannabis market). All these activities are incredibly valuable in helping companies be “ready to respond” when the recall occurs—but many companies that have access to these pre-incident funds either don’t realize they have them or don’t understand how to access them. In our experience, the companies that best utilize pre-incident funds are the ones that break down the barriers discussed above and integrate risk managers who “own” the policies with those responsible for mitigating recall-related risks (often a combination of quality, supply chain, crisis management and business continuity professionals within an organization).
Say you take out a product recall policy with pre-incident funds from an insurer. You can spend these funds in various ways:
- Educating employees across your supply chain about the importance of safe manufacturing practices.
- Training employees on what to do in the event of a recall.
- Developing new initiatives that improve product safety.
- Organizing mock recall planning and procedures.
The problem is that not all insurers promote pre-incident funds, and many manufacturers are unaware they can have financial resources for product recall management.
What Is a Risk Mitigation Consultant?
Product recall management can be complicated, whether you have the funds to execute it or not. One of the most effective ways to spend pre-incident funds from product recall insurance is on a risk mitigation consultant or mock recall planner, who can help reduce your company’s liability risks.
A reputable risk mitigation consultant can develop a long-term strategy for product recall management in your medical device company. That strategy might involve mock recall planning and procedures, recall simulations, identifying potential risks that could trigger an FDA recall, and minimizing your exposure to financial loss because of a recalled product. Think of a risk mitigation consultant as a partner who works alongside your organization and prevents the worse from happening.
You might think hiring such an expert is an unnecessary expense because, again, the likelihood of a product recall is so low. But with recalls in the medical device industry on the rise, working with a mitigation specialist could provide you with a significant return on your investment. Plus, many consultants offer their fees at a reduced rate. Our consultant services are already on the approved list by most of the major product recall insurers.
Conclusion
Few organizations invest in medical device product recall insurance despite the costs of responding to an FDA recall notice. Even fewer companies realize they could access pre-incident funds to prevent a recall from occurring in the future. If you are serious about compliance, take out a policy that provides you with funds for product recall management. Then, consider working with a risk mitigation consultant who can reduce your liability risk.
MockRecalls.com can help your medical device company deal with mock recall planning, procedures, exercises, and testing. Schedule a 1-hour free mock recall consultation here.